Finance minister P Chidambaram on Thursday cut the securities transaction tax (STT) from 0.17% to 0.01%. This means that transactions in equities and mutual fund units will now attract a tax of only Rs 10 for a transaction worth Rs 1 lakh against Rs 170 per Rs 1 lakh earlier.
Simultaneously, the government has also introduced a levy of 0.01% on non-agricultural commodities.
The reduction in STT, which is levied on every stock market transaction, is expected to encourage investments in the stock market, feel analysts.
“The STT reduction will help returns as it will lead to lower transaction costs,” said Aashish Somaiyaa, CEO, Motilal Oswal AMC, a leading stock market intermediary.
“The reduction of STT across financial instruments will provide a boost to the capital markets,” said Naresh Makhijani, partner, KPMG.
The tax had become controversial as its imposition had led to a fall in volumes in both the cash and derivatives segments as it hit the businesses of day traders, jobbers and arbitrageurs, who, typically, work on very thin margins.
The government collects Rs 7,500 crore annually as STT since its introduction in 2005. The proposed reduction may lead to slight decrease in this revenue.
However, it is expected to boost the government’s disinvestment programme as lower transaction charges may attract investors to the initial public offerings and follow-on public offerings of public sector companies.
But there are contrarian voices as well. “Reducing STT will not attract retail investors. Strict norms to stop manipulation and severe punishment of the manipulators will,” said Vijay Kedia, director, Kedia Securities.